Banks EMEA Norway The Major Sparebanken of the SpareBank 1 Alliance The Sparebanken Benefit from a Supportive Operating Environment Special Report │ 13 January 2020 fitchratings.com 1 Banks EMEA Norway The Major Sparebanken of the SpareBank 1 Alliance The Sparebanken Benefit from a Supportive Operating Environment SpareBank 1 Alliance Regional Market Shares Strong Franchises, Regional Concentrations The ratings for SpareBank 1 SR-Bank (SR-Bank; A-/Stable), SpareBank 1 SMN (SMN; A-/Stable) and SpareBank 1 Nord-Norge 37% (SNN; A/Stable), which are members of the Sparebank 1 Alliance 35% (collectively: the Sparebanken), reflect their stable and low-risk business models, healthy profitability, resilient asset quality and sound capital ratios. The ratings also factor in risks arising from volatility in oil prices, high property prices, geographically 22% concentrated lending and liquidity management in the context of the banks’ wholesale funding reliance. SNN’s ratings are one notch higher than its Sparebanken peers’, 30% reflecting better asset-quality metrics, limited oil exposure and a more retail-oriented business model. 23% 39% 27% 3% Supportive Operating Environment 18% 8% Oslo: The Sparebanken’s performances are closely linked to that of the 9% 12% 24% 12% 31% 16% Norwegian economy and their respective regions, given their 9% regional focus. Fitch Ratings expects the Norwegian banking sector to continue to benefit from the country’s favourable economic Shading reflects strength of market share in the region. environment. However, the Sparebanken remain dependent on oil- Source: Fitch Ratings, SpareBank 1 Group Research related industries, although to varying degrees. A major part of impaired loans at end-September 2019 was related to this industry. Traditional Banking Business Models The Sparebanken’s business models have proven stable due to their focus on traditional banking and their relatively simple organisational structures. The Sparebank 1 Alliance brand is Related Research established throughout Norway as one of the country’s most recognised financial brands with about one million retail SpareBank 1 SMN - Ratings Navigator (September 2019) customers and market shares of about 20% in retail banking and SpareBank 1 SR-Bank - Ratings Navigator (September 2019) 15% in corporate banking. SpareBank 1 Nord-Norge - Ratings Navigator (September 2019) Reduced Exposure to Offshore Industry SpareBank 1 SMN (January 2020) The Sparebanken’s asset quality is strong and compares well with SpareBank 1 SR-Bank (January 2020) international peers’. Impaired loans were a low 60bp-170bp of gross loans at end-September 2019. We do not expect further oil- SpareBank 1 Nord-Norge (January 2020) related asset-quality weakness, although individual cases may still emerge. The banks have also reduced their exposure to the offshore industry in general and to the offshore service vessel Analysts (OSV) segment in particular in recent years. Francis Dallaire Earnings Supported by Rate Hikes +46 85510 9444 The Sparebanken have good profitability, which we expect will [email protected] continue in 2020. The banks benefit from resilient revenue, reflecting stable banking models weighted towards traditional Image Erik Rankeskog commercial banking, and supported by their strong regional +46 85510 9445 franchises and the SpareBank 1 Alliance. Net interest income (NII) [email protected] has recently been supported by raising policy rates in Norway. Image Special Report │ 13 January 2020 fitchratings.com 2 Banks EMEA Norway moderate price increase in recent quarters. Additionally, Fitch Supportive Operating Environment believes there is a better balance between demand and supply Strong and Resilient Norwegian Economy compared with previously. Fitch believes that central Norway, where SMN operates, has a Low Interest Burden and Modest Increase in Housing reasonably diversified economy. Northern Norway, where SNN Prices to Disposable Income operates, is supported by a large and stable public sector, strong Belgium Switzerland Denmark Finland growth in tourism and faster economic growth in recent years than France Netherlands Norway Sweden the Norwegian average. Rogaland, the centre of Norway’s oil (Households with heavy financial burden industry and SR-Bank’s main market, has faced pressure in the due to housing costs, % end -2018) most recent downturn but macroeconomic conditions have 30 improved significantly over the past two years. 20 10 Resilient Norwegian Economy 0 (%) GDP mainland Norway (LHS) 0 20 40 60 80 Offshore activities (LHS) (Development of the house price to disp. Income ratio between 2000 and 2018 -%) GDP growth Norway (RHS) Size of bubbles represents real price development of housing since 2000. GDP growth mainland Norway (RHS) Source: Fitch Ratings, Eurostat, OECD 100 6 80 4 In contrast, there are signs of overheating in the commercial 60 property market. Fitch believes that prices are rising fast, 2 40 especially in Oslo. The Sparebanken do not have significant 20 0 exposure to the commercial real-estate market in Oslo, where 0 -2 overheating risks are most visible. Fitch believes that overheating risks are lower in the banks’ regions. 1987 1991 1995 1999 1971 1975 1979 1983 2003 2007 2011 2015 Source: Fitch Ratings, Statistics Norway Strong Regulator Enforces Conservative Risk Appetite Fitch expects the Norwegian banking sector to continue to benefit The Norwegian regulatory environment is highly developed and from the country’s favourable economic environment. The transparent. In recent years, the authorities have introduced a economy has proven resilient to the weaker global growth in 2019. range of measures to tackle rising property prices and household Fitch expects growth to rise to 2.5% in 2019 driven by internal debt. The rules in the diagram below were introduced in 2015 and demand and supported by strong spillover effects from large again renewed recently, hence effective until 31 December 2020. petroleum investments, high capacity utilisation and positive labour market dynamics. The Norwegian economy is still dependent on oil-related activities. 85% LTV at Origination High Property Prices, but Risks Are Modest Max 60% Amortisa- LTV for Nominal house prices in Norway have increased significantly in the tion Secundary req. homes in past decades, in comparison with peer countries. Oslo Underwriting High Property Prices Standards for Morgage Index Lending (1993=100) DNK FIN NOR SWE EA 5% stress 10% on interest flexibility 700 burden quotaa 600 500 5x debt-to- 400 income 300 200 100 a The flexibility quota is defined as the share of loans for which Norwegian banks can deviate from the requirements. These are reported quarterly to Finanstilsynet. 2003 2008 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EA: European Area Average In March 2019, the EU’s Capital Requirements Directive IV and Source: Fitch Ratings, OECD Capital Requirements Regulation were incorporated into the However, the increase in house prices in relation to disposable European Economic Area Agreement. Once fully implemented in income has been more modest compared with peers. Owing to low domestic regulations, they are expected to lead to positive impacts interest rates and strong wage growth, Norway has one of the on Norwegian banks’ capital ratios due to the introduction of SME lowest shares of households with heavy financial burden due to discounts and the removal of Basel I floors. The Norwegian housing costs in Europe. With 95% of residential mortgage loans Financial Supervisory Authority (Finanstilsynet) and the Ministry being flexible rates, debt service burdens could escalate if interest of Finance have stipulated that these rules’ implementation should rates were to rise faster than expected. However, we believe that not lead to a decrease in capital. The Ministry of Finance has the risks for overheating in the residential property market are decided to increase the systemic risk buffer requirement to 4.5% modest as recent macro-prudential measures have led to a more from 3.0% and to introduce risk-weight floors for residential (at Special Report │ 13 January 2020 fitchratings.com 3 Banks EMEA Norway 20%) and for commercial real-estate (at 35%) exposure. In addition the countercyclical buffer has increased to 2.5% from 2.0%, Stable Business Models effective as of 31 December 2019. Peer Ratings Navigator The Sparebanken’s overall risk-weight densities are more Operating Company Manage- Risk Financial Profile Viability Environ- Profile ment & Appetite Asset Earnings & Capitalisati Funding & Rating conservative compared with peers. ment Strategy Quality Profitabil- on & Liquidity ity Leverage Conservative Risk Weights in Sparebanken aaa aaa (%) Risk weight density (LHS)ᵃ Leverage ratio (RHS) 90 (%)9 aa+ aa+ 80 8 aa Bank aa 70 7 - SR SNN 60 6 SMN 50 5 aa- aa- 40 4 30 3 a+ a+ 20 2 Bank Bank Bank a - a - 10 1 - SNN SMN SMN SNN SR SNN SMN SR SR 0 b 0 SNN SNN SMN SR-Bank Average peers Bank Bank Bank Bank a- - a- - SNN - a Risk weight density measured by RWA/total assets - SMN SNN SMN SNN SR SR SNN SMN SR SMN b SR From left to right: end-2010 to end-Spetember 19 for Sparebanken and end-2018 Bank SMN bbb+ - bbb+ for peers SR Source: Fitch Ratings, Banks bbb bbb Higher influence Norwegian insolvency laws are tough and function properly. Moderate influence Combined with significant customer data transparency, including Lower influence the national debt register, this creates a significant incentive for households not to default on mortgage obligations. The Sparebanken further mitigate the default risks through low Independent Regional Savings Banks in Nationwide average loan to value (LTV). More than 90% of mortgage loans at Alliance SNN, SR-Bank and Sparebank 1 Boligkreditt AS (S1B) (no In 1996, SNN, SMN and SR-Bank founded the Sparebank 1 disclosure for SMN) have an LTV below 85%. Alliance along with Sparebanken Vest and Samspar, a group of smaller savings banks. Sparebanken Vest withdrew from the MREL Requirements Announced venture in January 2004 to pursue an independent strategy.